Creating wealth in your own lifetime is one thing, but insuring wealth for future generations is a business in itself. For those with investable assets, typically over $10m and seeking tailored wealth management services, family offices are the answer. Traditionally these bespoke services offer high net worth individuals (HNWIs) much more than just your usual private bank service, often managing household staff, property management, philanthropy coordination, managing family education, intergenerational transfer and legal and tax services.
A recent report published by global wealth consultancy Wealth Insight, estimates the number of Family Offices globally at over 5,000, and accounting for $2.5trn worth of global HNW wealth. This wealth accounts for 13% of global assets under management (AuM), with the US the biggest player within the sector, accounting for an estimated 2,900 family offices.
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WealthInsight has broken the industry down into 2,700 single family offices (SFO), which work exclusively for one family and its members, their related trusts, foundations, charities, non-profit organizations and family-related investment vehicles. SFOs account for $1.7trn of assets, while the 2,300 multi-family offices (MFO,) account for the remaining $800bn of assets being managed. In reality it is typically those ultra high net worth individuals (UHNWI) in $30m and above range who begin to access MFOs, while those with $100m or above who create their own SFO, due to the expense involved in operating a family office.
Family offices have seen strong growth off the back of the 2008 financial crisis, with many ultras pushing away from the private banking format and opting for the more tailored approach of either setting up their own family office or joining a MFO. The selling point for family offices is the service, especially the investment portfolio, is set up exclusively in the best interest of the client. The majority of offices are still based out of Europe and the US, but recent reports show strong growth out of China, Australia, Singapore, Hong Kong and Canada.
Growth outside of Europe and U
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By GlobalDataJames Burkitt, CEO and founder of The Table Club, an Australasian family office network, says the number one rule of family offices is ‘don’t lose money, number two don’t forget number one’. He has seen considerable growth in Australian family offices as people look to secure new found wealth from the resource boom. The industry has been heavily influenced by wealth attached to mining and mining services. This push in the economy has also helped other family offices capitalise on a strong Australian dollar and move significant capital around.
"We’ve seen families concentrating on preservation rather than significant wealth generation," Burkitt says.
Despite the resource boom, the majority of family offices are still based out of the east coast cities of Sydney, Melbourne and Brisbane, and the majority of SFOs are still based on wealth from real estate. Western Australia, however, offers the greatest potential for growth from the sector as it has the lowest number of SFO to UHNWIs.
Challenging times
The UK family office sector is still a relative minnow in comparison to the US and Switzerland, but there has been strong growth over the past decade with WealthInsight putting the number of offices at 300. A significant amount of wealth in the $10m to $100m bracket means many people are opting for the services of MFO, allowing them the bespoke services without incurring the fees of a SFO. Even within the MFO sector, considering the number of UHNWIs, Wealth Insight sees it as an underdeveloped area, open to growth.
Following the 2008 financial crisis, family offices have faced considerable challenges, not the least being scrutinised by clients, who are now taking a lot more active involvement in how the investment portfolios are constructed. On top of this tax exposure, risk management, new technologies and expansion of capital markets, have all caused issues globally for the sector.
Stonehage is one MFO operating out of the UK who focuses on servicing the needs of 1,000 families, with its investment arm advising on $2.6bn of assets. Kirsten Boldarin, an investment director at the office, identifies a tough market and a disparity between client’s expectations on return on investment, versus risk, as a major challenge facing their business.
"Clients, because of where cash rates were historically, have set in their mind that returns per annum should be in the 8-10% range," Boldarin says.
Considering the current cash rates being closer to zero and return on bank and government bonds offering low yields, she says the risk involved in obtaining returns of 8% or more are considerable, and expectations need to be tempered.
"What we don’t want is that the clients try to push further up the risk spectrum in order to generate the 8-10%, and then find themselves in a position where they have taken risks which they feel uncomfortable with."
On the flip side, there is the problem with over cautious reactions from clients following 2008 and this, in itself, has its own short comings, leaving wealth open to inflationary pressures. The balance between guarded investing and real time losses is a tight one and Boldarin says much of the relationship between the client and Stonehage is understanding the clients needs, and the ‘loss tolerance levels’ they are willing to accept to achieve this.
Mining driving Australia’s FOs
Australia in contrast has been relatively unaffected by many of the trappings Europe and the US experienced during 2008. For many family offices the strong rates meant ‘people didn’t even have to get out of bed and they still got 6%’ returns, says Burkitt.
"So that’s now come back and that’s forcing them to look at deploying that capital into other areas," he adds.
There has been a slow down in the economy as the mining boom has levelled out and other economic factors have slowed growth.
"There has been quite a lot of capital that has gone back into the Australian share market and that has followed the high dividends paying stocks," Burkitt explains, as people look to diversify capital to preserve wealth.
He sees Australian families as ‘thematic and opportunistic’, taking advantage of a strong home dollar to buy US currency and invest in Asia.
"They will follow trends where they see opportunities in terms of allocation of their capital. They tend to put smaller amounts across a number of things," says Burkitt.
"They will stick to the knitting of what-ever their core business is, and they will invest large capital sums in their core area of competency."
Diversification away from the core business is not always the norm. In the case of people like Gina Rinehart and Andrew Forrest, two of Australia’s wealthiest mining magnates, they have focused the efforts inwards to help maintain wealth.
Forrest is an example of someone who has successfully restructured his finance, allowing him to leave his shares in his core business undiluted, structuring for long term returns rather than quick capital. One feature of the Australian family office landscape is the way many of the bigger players have taken advantage of tax reductions by deploying more of their funds into their charities and foundations. Burkitt says the major areas where you see families’ diversifying is getting the next generation to take over control of the office and starting to spread them across many opportunities.
Uncle Fam
While the family office space is growing in places like Australia and the UK, the US remains the centre of the family office universe. MFOs like Bessemer Trust and Rockefeller Financial make many private banks’ look like boutique outfits. Bessemer remains the biggest family office in the world with assets under management (AuM) of $62bn. About 700 staff cater for their 2,100 clients, operating across the US, as well as the UK and the Cayman Islands. Rockefeller works with only 250 staff to manage $30bn of wealth for its almost 300 clients, while Ziff brothers, equal second in the global stakes, also manages $30bn worth of assets for its clients. The US dominance is underlined by the fact that US based family offices account for more than half of the top 20 family offices globally, all with $9bn of AuM or more.
The US dominance is not expected to diminish, but they face significant challenges, especially with the introduction of the Dodd-Frank Act requiring them to register with the Security Exchange commission, or revert to a SFO. For most US based family offices however, the tests at home are outweighed by the opportunities they have globally, with many firms looking to take advantage of emerging markets in Asia and Latin America.
Sky’s the limit?
Even taking into account the recent growth in family offices globally, WealthInsight forecasts the potential for even further growth. WealthInsight estimates Asia’s
HNWIs will triple to nearly 15.8m by 2015 and sees the potential for more than a 1,000 new Asian family offices to be created by 2020. There are great opportunities for growth, not only in emerging markets, but also in established areas of wealth such as Singapore and Hong Kong.
The chance to take advantage of HNWI baby boomers retiring and looking to pass on wealth to the next generation and the possibilities within emerging markets, give the area great opportunities to expand. Many high level hedge fund managers and executives are already beginning to set up their own family offices. Clients themselves are looking to have their wealth and investments approached more globally and cement broader ties, all of this will lead to a much broader and complex family office network in years to come. <
